Joe-Duarte.com - Market Intelligence, Daily Market Winners

Dallas, TX
December 22, 2009, 08:00 EST

Dr. Joe Duarte's Market I.Q.

The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors

Jobless Funds Fading Fast

What's Hot Today:

U.S. stock index futures were pointing to a higher open on Tuesday. Steady markets and a steady dollar overnight and positive seasonal tendencies could overrun any negatives. There are still the usual economic and political worries and the intangibles to consider as always.

Today's Economic Calendar:

ICSC-Goldman Store Sales 7:45 AM ET
GDP 8:30 AM ET
Corporate Profits 8:30 AM ET
Redbook 8:55 AM ET
Existing Home Sales 10:00 AM ET
FHFA House Price Index 10:00 AM ET
4-Week Bill Auction 11:30 AM ET

News For Thought

Yahoo closes for a week in money saving move. According to The Wall Street Journal: "Yahoo is shutting down its offices, except for "essential functions," from Dec. 25 through Jan. 1, as the Internet company searches for new ways to cut costs during the recession."

New York: An Unhappy Place. According to The New York Times: "a study by two economics professors, newly published in Science magazine. The academics — Andrew J. Oswald, of the University of Warwick in Britain, and Stephen Wu, of Hamilton College in Clinton, N.Y. — examined piles of data, tossed them into a research Cuisinart and came up with a guide to American happiness, ranked by state. On the smiley scale, New York landed on the bottom." The silver lining: "At least New Yorkers can take comfort in knowing that their immediate neighbors in Connecticut (No. 50) and New Jersey (No. 49) are not appreciably happier."

White House tax credit plan for hiring not likely to succeed in tough economy. According to The Wall Street Journal: "An Obama administration plan to give small-business owners tax credits to hire new employees likely won't entice them to do so unless the economy picks up. Business owners across the country said they appreciate the recent attention to their plight, but say that for the credit to make a difference they need to see more specifics -- and more customers."

Jobless Funds Fading Fast

Another Safety Net On The Ropes

As the White House and Congress celebrate their health care reform victory, which many project will delay and hinder hiring due to its hidden costs, state unemployment coffers, the last ditch safety nets before welfare, are drying up.

According to The Washington Post: "The recession's jobless toll is draining unemployment-compensation funds so fast that according to federal projections, 40 state programs will go broke within two years and need $90 billion in loans to keep issuing the benefit checks."

That leaves states with two options, shrink payments or raise taxes, both of which are highly unpopular alternatives. According to The Post: "Debates over the state benefit programs have already erupted in South Carolina, Nevada, Kansas, Vermont and Indiana. And the budget gaps are expected to spread and become more acute in the coming year, compelling legislators in many states to reconsider their operations."

And although the projections suggest that the states have time, not all of them are in the same shape. In fact: "25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps. By 2011, according to Department of Labor estimates, 40 state funds will have been emptied by the jobless tsunami." That means that as the health care reform is about to raise taxes and expand Medicaid for those uninsured, the potential for an even bigger number of people needing Medicaid and other forms of aid may rise, if the job market remains anywhere near the current situation. This suggests that the projections for the revenues needed to sustain the now expanded social safety net will actually rise, barring a reversal in the economy.

Yet, with large oppositions to health care reform remaining, and with businesses not likely to expand, state and federal tax bases are more likely to shrink, leading to even lower potential revenues for the government in order to finance its expanding entitlement programs.

What makes the state employment shortfalls even more pressing is the level of debt that many of these funds have already incurred to the federal government. Nevada for one owes the U.S. government some $85 million, prompting calls for a state income tax. More interesting is the fact that because state employment funds are separate from regular budgets there are fewer gimmicks applicable, which means that the only options are to lower benefits or raise the payroll tax. South Carolina owes the federal government some $654 million for money borrowed to pay unemployment benefits, reported the Post.

Conclusion

Many states are a lot closer to being broke than many people realize, especially if you count the amount of money that they may owe the federal government to pay unemployment benefits. Yet, it's the federal government that is making it difficult for businesses to hire workers as it piles on regulations and direct and indirect taxes.

The health care bill, yet to be signed by President Obama is the biggest source of uncertainty at the moment, with its fine print, hidden fines and in many cases obtuse language. But it may not be the last nail in the coffin as the "green" initiatives from the EPA start to take effect at some point in the future, adding more layers of cost to businesses that are already struggling.

The net effect is the perpetuation of a vicious cycle in which rising regulation and higher taxes will likely keep businesses running with as few employees as possible. The upside, if any is that the number of contractors will likely rise, thus small companies that offer those kinds of services will likely do reasonably well, assuming that they want to be busy enough to pay more taxes and face higher regulation.

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Market Moves - Stock Of The Day

Small Stock Russell 2000 ETF (NYSE: IWM) Closes Gap

The Small Stock Russell 2000 ETF (NYSE: IWM) has quietly closed the performance gap with the big cap stocks, a potentially positive sign for the stock market.

Chart Courtesy of StockCharts.com

As the S & P 500 has struggled to rise above 1120 the small stocks have been making up ground. The Russell 2000 index closed trading on 12-21 just five points below its recent high of 623.94, meaning that the small stocks are now acting just about as well as the large cap stocks.

That means that as the uncertainty of the current political climate has been rising, value investors have likely been adding to positions in the small cap arena.

And at the center of the mix is the dollar. Small companies tend to do better with a strong dollar since their sales are less dependent on international business and more on domestic.

The strong dollar is also starting to weaken the potential future sales of large multinational corporations, such as Procter & Gamble whose shares have been sagging of late.

New highs in the small stocks would be very bullish for the overall market and would likely signal that big money is starting to make big bets on a dollar bottom. The latter point is huge for the market in 2010.

Technical Look at the Market

S & P Hugs New Highs But No Cigar - SPY ETF Remains at 4-stars

The S & P 500 closed at 1114 on 12-21. It was a good day, but not good enough, as the 1119 area again proved to be resistance. That means that neither the bulls nor the bears gained any meaningful ground on the day, and that prices could move in either direction as things develop.

It's hard to predict what's next, given so many crosscurrents in the market. The key is whether traders want to take prices higher before the Christmas holidays or if they will walk away for the year leaving little but thin trading influenced volatility behind.

So the technical aspects of the market are increasingly important, and that's why the shrinking volatility bands are very important to keep an eye on.

The bottom line is that it pays to be careful.

Summary of Start Rating System

We are adapting our star based rating system to the S & P SPDR ETF (NYSE: SPY). In this section a 5-star rating for SPY is a signal that down side risk is very low and that the chances of a further rise in prices are greater than those of a fall. A 4-star rating Means that the risk is less attractive but that the odds of a rise in SPY still outweigh the risks of a fall.

A 3-stars rating on SPY suggests that the odds of a rise and a fall are even. 2-stars and 1-stars suggest that down side risk is on the rise.

In no way is this star rating system intended as a series of buy and sell recommendations. The system is intended as a guide to the general trend of the market and the S & P SPDR ETF.

Star ratings can change rapidly based on the market's action. Followers of the ratings should review them on a daily basis.

Star Ratings for S & P SPDR ETF (NYSE: SPY) - updated 12-16-09

S & P SPDR ETF (NYSE: SPY), 4 stars on 12-1-09 - closing price 110.84. Closing price on 12-21-09 111.33. Short term support is at 109.57. Resistance is at 111.74 and is being tested. A sustained move move above 111.74 would raise the rating to 5-stars. A move below 109 would drop the rating to 3-stars.

Chart Courtesy of StockCharts.com

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